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Benefits of Dynamic Pricing  Closer alignment of retail prices with underlying wholesale costs  Provides truer economic signals to consumers of the costs of electricity production and delivery –Reveals the temporal and geographic value of electricity  Fairer allocation of costs to those who cause them 2

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Typical Tariff Elements  Definitions  Nature of customer’s participation in other demand response programs  Minimum term of service under the tariff  Other conditions –“Bill protection” for first 12 months The lower of the bill under the CPP rates or the bill under the otherwise applicable tariff 11

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Dynamic Pricing and Basic Service  Some experience with basic service procurement suggests that competitive wholesale suppliers (unlike competitive retail suppliers) are not particularly interested in providing products with more dynamic pricing structures –In MD, suppliers ignored the request for TOU prices. BGE reverse-engineered TOU prices from the winning bids’ flat rate offers Note: both participating customers and suppliers benefit from the demand response that the TOU prices elicit—yet, for whatever reason, the benefits were not enough to cause the suppliers to develop the prices themselves 16

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Dynamic Pricing and Basic Service  Given this, there’s concern that suppliers will ignore basic service RFPs that call for, say, critical peak pricing –States may have to specify certain elements of a CPP tariff, including possibly the price –Extreme: the state specifies the rate structure and prices for each rate element, then calls on suppliers to say how much they’d be willing to provide service at those rates Responses could be positive, negative, or zero –If positive, customers would see credits on their bills; if negative, surcharges. –Does this address supplier concerns? –Or, slice procurement of basic service by baseload, intermediate, and peaking Would this capture the hedge premium? 17

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Issues for Tariff Design  Impacts on utility billing systems? –Difficulties dealing with significant changes to rate structures?  How to estimate and capture for customers the hedging premium embedded in average rates? –Is real-time pricing the answer? 18

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What is the value of the premium for hedged rates?  Theory and analysis suggests that there is a hedge premium in non-dynamic prices –Brattle’s work suggests this “insurance premium” ranges from 3 to 13 percent for different types of time-varying rates –Illinois used a value of 10 percent in its RTP pilot for residential customers –Monte Carlo simulations with a standard financial equation suggest a mean value of 11 percent –A conservative estimate is 3 percent  How can the premium be captured? What costs are avoided? Is this a function of the degree of competition in the market? Source: The Brattle Group 19